For many solar stocks, the sun was certainly shining in 2013.
The industry was one of the best-performing sectors of the market, with broad measures like the Guggenheim Solar ETF (TAN) surging more than 120% throughout the year. A combination of dwindling costs and rising subsidies in key markets like China and Japan helped the fortunes of top solar stocks finally catch up to the their long-term promise.
However, the sector has recently met with some cloudy weather. And several solar stocks — particularly of the Chinese persuasion — may be in for darker times.
For investors, it may finally be time to cash in their Chinese solar stock bets and move on to sunnier pastures.
A Litany of Problems For Chinese Solar Stocks
The last few weeks haven’t been great for Chinese manufacturers of photovalic (PV) panels. Share prices for key solar panel producers like Trina Solar (TSL) and Yingli Green Energy (YGE) have basically imploded since reaching March highs. YGE alone is down about 40% since then.
And while you can make the argument that the Chinese solar producers were just caught up in the general momentum stock selloff we’ve been experiencing, something more sinister is afoot. I’m talking about a reversal of all the good fortune that has recently shined on the sector.
One of the key driving forces behind the solar boom has been the abundance of cheap Chinese-manufactured panels. Well, rising input costs — the cost of energy needed to run solar panel factories — along with supply constraints are lifting prices for Chinese-produced PV. According to Boston-based green think-tank GTM Research, the price of Chinese-made solar panels will rise about 20% this year.
And already, the price rise is beginning to take shape. According to its latest report, GTM shows that Chinese solar producers like JinkoSolar (JKS) have priced their modules at 80 to 85 cents per watt for new deliveries. That compares to just to 70 cents per watt at the end of 2013.
Historically, Chinese produced solar panels have been significantly cheaper than those produced in other Areas like the United States and Europe. That fact lead to several high profile-bankruptcies of developed market solar producers like Germany’s Q-Cells. All in all, GTM Research estimates that more than half of modules sold in the U.S. last year were Chinese-made.
The rub is that these higher-priced solar panels must now compete with all that ultra-cheap natural gas being produced in spades across the U.S.
And prices for Chinese-produced solar panels could rise even further in the years ahead. Here’s why…
In order to get prices so cheap in the first place, the Chinese government basically uber-subsidized the solar industry with cheap loans, preferential taxes and other state-backed incentives.
Both the U.S. & European Union have claimed that these policies wreak of dumping and have begun a series of investigations and tariffs on imported solar panels. The U.S. is in the process of closing loopholes to make those tariffs stricter, while the E.U. has yet to formalize an agreement with China on anti-dumping measures.
When that deal is finalized, Chinese solar stocks will now face much higher selling prices in one of their traditional hotbeds of activity. And the other hotbeds of new activity aren’t exactly running at full tilt, either.
After its Fukushima nuclear disaster, Japan has turned to solar as a means to power its nation. Japan spent heavily on new feed-in-tariffs (FiT) and subsidies to spur adoption of solar energy. That fact was a huge boost to solar stocks share prices. Unfortunately, Japan has decided to cut the FiT by 11% to 31 cents per kilowatt-hour because “Other types of clean energy have not increased.” To that end, Japan actually increased subsidy rates for wind and hydro-power.
Add in Europe’s continued austerity measures and the lack of any real energy policy in the U.S. and you have a recipe for more losses for Chinese solar stocks.
Time To Bail On Chinese Solar Stocks
With so many headwinds facing Chinese solar stocks, the time to cut and run may be nigh. Especially when you consider just how high many of these things have run up in the last year so. Pressures are going to crimp sales and cash flows at the solar producers — none of which is good for share prices or investors.
And we’ve already begun to see the damage.
TSL has reported that it shipped 20% fewer panels than it expected due to the anti-dumping tariffs and higher prices during the first quarter. That warning sent the stock down about 4% last Friday. Any more stumbles could erase all TSL’s gains from last year. The other Chinese solar manufacturers are all at risk for the same, or worse — several more bankruptcies in the sector.
Both Suntech and Chaori Solar have already filed, while LDK (LDK) is in the process of doing so and delisting from the NYSE.
All of this negative activity doesn’t inspire a whole lot of confidence in Chinese solar stocks. For investors, the best course of action could be to bail on the sector completely or at least move out of individual names and into a broad play like the TAN or Market Vectors Solar Energy ETF (KWT).
For now, the sun appears to be setting on the solar sector once again.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.